Problem Set - 1

Question 1
Dominance
1\ 2 x y z
a

1,2 2,2 5,1

4,1 3,5 3,3

5,2 4,4 7,0

2,3 0,4 3,0

Find the strictly dominant strategy:

1) a;

2) b;

3) c;

4) d;

5) x;

6) y;

7) z

Question 2
Dominance
1\ 2 x y z
a

1,2 2,2 5,1

4,1 3,5 3,3

5,2 4,4 7,0

2,3 0,4 3,0

Find a very weakly dominant strategy that is not strictly dominant.

1) a;

2) b;

3) c;

4) d;

5) x;

6) y;

7) z

Question 3
Dominance
1\ 2 x y z
a

1,2 2,2 5,1

4,1 3,5 3,3

5,2 4,4 7,0

2,3 0,4 3,0

When player 1 plays d, what is player 2's best response?

a) Only x

b) Only y

c) Only z

d) Both y and z

Question 4
Dominance
1\ 2 x y z
a

1,2 2,2 5,1

4,1 3,5 3,3

5,2 4,4 7,0

2,3 0,4 3,0

Find all strategy profiles that form pure strategy Nash equilibria (there may be more than one,
or none):
1) (a, x);
7) (c, y);

2) (b, x);
8) (d, y);

3) (c, x);
9) (a, z);

4) (d, x);

5) (a, y);

10) (b, z);

11) (c, z);

6) (b, y);
12) (d, z).

Question 5
Nash Equilibrium - Bargaining
There are 2 players that have to decide how to split one dollar. The bargaining process works
as follows. Players simultaneously announce the share they would like to receive s1 and s2,
with 0 s1, s2 1. If s1+s2 1, then the players receive the shares they named and if s1+s2>1,
then both players fail to achieve an agreement and receive zero.
Which of the following is a strictly dominant strategy?
a)1;

b) 0.5;

c) 0;

d) None of the above.

Question 6
Nash Equilibrium - Bargaining
There are 2 players that have to decide how to split one dollar. The bargaining process works
as follows. Players simultaneously announce the share they would like to receive s1 and s2,
with 0s1,s21. If s1+s21, then the players receive the shares they named and if s1+s2>1,
then both players fail to achieve an agreement and receive zero.
Which of the following strategy profiles is a pure strategy Nash equilibrium?
a) (0.3, 0.7);

b) (0.5, 0.5);

c) (1.0, 1.0);

d) All of the above

Question 7
Bertrand Duopoly
Two firms produce identical goods, with a production cost of c>0 per unit.

Each firm sets a nonnegative price (p1 and p2).

All consumers buy from the firm with the lower price, if pipj. Half of the consumers buy
from each firm if pi=pj.
D is the total demand.
Profit of firm i is:
o 0 if pi>pj (no one buys from firm i);
o D(pic)/2 if pi=pj(Half of customers buy from firm i);
o D(pic) if pi<pj (All customers buy from firm i);

Find the pure strategy Nash equilibrium:

a) Both firms set p=0.

b) Firm 1 sets p=0, and firm 2 sets p=c.

c) Both firms set p=c.
d) No pure strategy Nash equilibrium exists.
Question 8
Voting

Three voters vote over two candidates (A and B), and each voter has two pure strategies:
vote for A and vote for B.
When A wins, voter 1 gets a payoff of 1, and 2 and 3 get payoffs of 0; when B wins, 1
gets 0 and 2 and 3 get 1. Thus, 1 prefers A, and 2 and 3 prefer B.
The candidate getting 2 or more votes is the winner (majority rule).

Find all very weakly dominant strategies (there may be more than one, or none).
a) Voter 1 voting for A.

b) Voter 1 voting for B.

c) Voter 2 (or 3) voting for A.

d) Voter 2 (or 3) voting for B.

Question 9
Voting
Three voters vote over two candidates (A and B), and each voter has two pure strategies: vote
for A and vote for B.

When A wins, voter 1 gets a payoff of 1, and 2 and 3 get payoffs of 0; when B wins, 1
gets 0
and 2 and 3 get 1. Thus, 1 prefers A, and 2 and 3 prefer B.
The candidate getting 2 or more votes is the winner (majority rule).

Find all pure strategy Nash equilibria (there may be more than one, or none)?
a) All voting for A.
b) All voting for B.
c) 1 voting for A, and 2 and 3 voting for B.
d) 1 and 2 voting for A, and 3 voting for B.

Problem Set - 2
Question 1
Mixed Strategy Nash Equilibrium
1\ 2 Left Right
Left 4,2 5,1
Right 6,0 3,3
Find a mixed strategy Nash equilibrium where player 1 randomizes over the pure strategy
Left and Right with probability p for Left. What is p?
a) 1/4

b) 3/4

c) 1/2

d) 2/3

Question 2
Comparative Statics
1\ 2 Left Right
Left x,2 0,0
Right 0,0 2,2
In a mixed strategy Nash equilibrium where player 1 plays Left with probability p and player
2 plays Left with probability q. How do p and q change as X is increased (X > 1)?
a) p is the same, q decreases.
c) p decreases, q decreases.

b) p increases, q increases.
d) p is the same, q increases.

Question 3
Employment

There are 2 firms, each advertising an available job opening.

Firms offer different wages: Firm 1 offers w1=4 and 2 offers w2=6.
There are two unemployed workers looking for jobs. They simultaneously apply to either
of the firms.
o If only one worker applies to a firm, then he/she gets the job
o If both workers apply to the same firm, the firm hires a worker at random and the
other worker remains unemployed (and receives a payoff of 0).

Find a mixed strategy Nash Equilibrium where p is the probability that worker 1 applies to
firm 1 and q is the probability that worker 2 applies to firm 1.
b) p=q=1/3;

d) p=q=1/5.

a) p=q=1/2;

c) p=q=1/4;

Question 4
Treasure

A king is deciding where to hide his treasure, while a pirate is deciding where to look for
the treasure.
The payoff to the king from successfully hiding the treasure is 5 and from having it found
is 2.
The payoff to the pirate from finding the treasure is 9 and from not finding it is 4.
The king can hide it in location X, Y or Z.

Suppose the pirate has two pure strategies: inspect both X and Y (they are close together), or
just inspect Z (it is far away). Find a mixed strategy Nash equilibrium where p is the
probability the treasure is hidden in X or Y and 1p that it is hidden in Z (treat the king as
having two strategies) and q is the probability that the pirate inspects X and Y:
a) p=1/2, q=1/2;
b) p=4/9, q=2/5;
c) p=5/9, q=3/5;
d) p=2/5, q=4/9;
Question 5
Treasure

A king is deciding where to hide his treasure, while a pirate is deciding where to look for
the treasure.
The payoff to the king from successfully hiding the treasure is 5 and from having it found
is 2.
The payoff to the pirate from finding the treasure is 9 and from not finding it is 4.
The king can hide it in location X, Y or Z.

Suppose instead that the pirate can investigate any two locations, so has three pure strategies:
inspect XY or YZ or XZ. Find a mixed strategy Nash equilibrium where the king mixes over
three locations (X, Y, Z) and the pirate mixes over (XY, YZ, XZ). The following probabilities
(king), (pirate) form an equilibrium:
a) (1/3, 1/3, 1/3), (4/9, 4/9, 1/9);
b) (4/9, 4/9, 1/9), (1/3, 1/3, 1/3);
c) (1/3, 1/3, 1/3), (2/5, 2/5, 1/5);
d) (1/3, 1/3, 1/3), (1/3, 1/3, 1/3);